The Impact of the ECB’s Targeted Long-Term Refinancing Operations on Banks’ Lending Policies: The Role of Competition

63 Pages Posted: 7 Feb 2019

Date Written: February 7, 2019

Abstract

We assess the impact of the Eurosystem’s Targeted Long-Term Refinancing Operations (TLTROs) on the lending policies of euro area banks. To guide our empirical research, we build a theoretical model in which banks compete à la Cournot in the credit and deposit markets. According to the model, we distinguish between direct and indirect effects. Direct effects take place because bidding banks expand their loan supply due to the lower marginal costs implied by the TLTROs. Indirect effects on non-bidders operate via changes in the competitive environment in banks’ credit and deposit markets and are a priori ambiguous. We then test these theoretical predictions with a sample of 130 banks from 13 countries and the confidential answers to the ECB’s Bank Lending Survey. Regarding direct effects on bidders, we find an easing impact on margins on loans to relatively safe borrowers, but no impact on credit standards. Regarding indirect effects, there is a positive impact on the loan supply on non-bidders but, contrary to the direct effects, the transmission of the TLTROs takes place through an easing of credit standards, and it is mainly concentrated in banks facing high competitive pressures. We also find evidence of positive funding externalities.

Keywords: unconventional monetary policy, TLTROs, lending policies, competition

JEL Classification: G21, E52, E58

Suggested Citation

Andreeva, Desislava and Garcia-Posada, Miguel, The Impact of the ECB’s Targeted Long-Term Refinancing Operations on Banks’ Lending Policies: The Role of Competition (February 7, 2019). Banco de Espana Working Paper No. 1903. Available at SSRN: https://ssrn.com/abstract=3330525 or http://dx.doi.org/10.2139/ssrn.3330525

Desislava Andreeva (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Miguel Garcia-Posada

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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